Mutual funds are one of the most popular ways to invest money in securities. They look back on a long history: The first equity fund was launched in the USA in 1924. The number of funds is now almost confusing. Over 10,000 funds are approved for trading in Germany.
- The costs of open-ended investment funds differ depending on the type of fund and the bank.
- There are numerous types of funds – every investor will find the right fund for their investment strategy.
- Funds are assigned risk classes so that savers can create a portfolio based on their risk appetite.
What are the advantages of mutual funds?
Not just beginners at the Stock exchanges , but also investors with experience on the stock exchange see funds as an absolute alternative to investing in individual stocks. One of the advantages of this type of investment is the diversification of risk: in contrast to individual investments equities , a fund is not dependent on the success of a particular company. For investors who do not want to do intensive research themselves, investment funds offer another advantage: The fund management selects the securities.
How much do mutual funds cost?
The fund companies pay for this through management fees. These are significantly higher for actively managed funds than for so-calledIndex funds that only track a specific index – for example the DAX. In the case of index funds, active intervention by the manager is only necessary if the composition of the underlying indices changes.
Other costs include custody fees: In order to invest in funds, investors need a custody account. When buying a fund, there is also a front-end load which, depending on the type of fund and investment company, can be between 0.5 percent of the investment amount (money market funds) and up to 6 percent (equity funds). Especially, however, direct banks often offer discounts on the initial charge. ETFs (exchange-traded funds) are an exception : When buying on the stock exchange, there are fees for stock exchange trading instead of an issue surcharge.
The taxation of mutual funds
Fund income is subject to tax in Germany – this applies to both realized price gains and distributions. The Withholding tax is paid either on distribution or on sale by the institution holding the units in custody. Reinvesting funds that reinvest the annual distributions directly in fund units are also taxed: The reinvested income represents “income equivalent to distribution” for tax purposes.
The fund categories
Short for MF by abbreviationfinder, mutual funds have become more structured over the years. While there were equity funds, pension funds and money market funds at the beginning of the 1970s, very specialized products can now be found within the individual categories. Here are a few examples:
Equity funds
- German stocks
- Small stocks
- Emerging markets
- Dividend stocks
- Industry and theme funds
- Regional values
- Funds issued in euros or in foreign currencies
- Without limitation, investments are permitted in all imaginable stock corporations
Pension funds
- Bonds in euros
- Foreign currency bonds
- Government bonds only
- Corporate bonds only
- Bonds of all kinds
- Regional bonds
- Only bonds from the best issuers
- High yield bonds (with a limited risk of default)
Money market funds
- Only in euros
- Only in foreign currency
- All currencies allowed
- Differentiation according to the creditworthiness of the issuer
Special forms
- Open Real estate funds
- Mixed funds
- Index funds
- Fund of funds
- Total Return Funds
- Warrant funds
The risks differ depending on the type of fund
From this rough overview it can already be deduced that investors are spoiled for choice. However, the choice is narrowed down by the risk-reward profile of an investor. Each fund is assigned to a risk class, which investors can use to determine whether they want to invest in this market segment. Money market funds in euros, for example, are not subject to price or currency risks and are therefore assigned to the most conservative asset classes. The stock of a Mexican construction company, quoted in pesos, is classified as risky.
Investment funds in German and foreign law
An investment fund is launched by a capital management company (old term: capital investment company). The customer money is kept in a special fund assigned to the respective fund. Here, however, a distinction must be made between funds with a German legal basis and funds under Luxembourg law, the SICAV funds.
According to German law, there is a fund company with fixed share capital. This invests the client money in accordance with the investment guidelines of the individual fund in a special fund assigned to this fund. If the investment company were to become insolvent, the fund would remain unaffected.
Foreign funds, recognizable by the addition SICAV, are stock corporations, which set up a new, subordinate stock corporation for each individual fund. The share capital increases depending on the inflow or outflow of funds from the respective fund.